Mortgage Caps Spark Developer Ire as Dubai Rebounds

New caps on mortgage lending will soon come into force in the United Arab Emirates, part of a long-running effort by the country’s central bank to keep real estate markets in check and avoid a debt-fueled bubble. And not everybody’s happy.

While the limits apply to all of the U.A.E.’s banks, they’re seen as largely aimed at Dubai, where a recent Standard Chartered report estimated apartment prices went up by about 38% year-on-year in October. Damac Properties, one of Dubai’s most active developers since prices started to recover, has been especially vocal about what it sees as unwarranted timidity by banks and a lack of mortgage lending to non-residents who make up a major portion of buyers and investors.

“Not everybody can come straight into the market with $1 million and buy a property with cash, in full,” Damac Managing Director Ziad El Chaar said prior to the approval of the limits. After the announcement of the caps, he said that while he welcomed the central bank’s attempts to regulate the market, “this new system does not include any guidelines for banks to provide a pragmatic and practical non-resident mortgage, which we believe is required to attract a more international investor base.”

The new rules, announced by the regulator on Monday, say expatriates can only borrow up to 75% of the value of a property, while citizens can borrow up to 80%. If a home isn’t built yet, the limit is 50% of the value of the investment. The rules are to take effect a month after they’re published in the country’s official gazette.

Many analysts have said that the restrictions aren’t a big deal because most transactions are already in cash: estimates vary, but some suggest that as many as 80% of property deals these days are done without any leverage.

For developers like Damac, however, who need to bring in new investors to keep up with major project launches, the new rules could be a troubling constraint. The company launched a $1 billion Paramount-themed project in March, followed by a huge master-planned community in the desert featuring a Trump golf course. It also hasn’t shied away from selling new units off-plan, a formula that shouldered a lot of the blame for the speculative bubble that burst in 2008. Under the new rules, people could only borrow half the value of their investments in Damac’s off-plan units. Dubai’s government also recently instituted an increase on property registration fees from 2% of a transaction’s value to 4%, adding to the costs for purchasers.

Despite the restrictions, banks aren’t yet throwing in the towel on mortgages. National Bank of Abu Dhabi, in fact, is trying to focus more on mortgage lending under new chief executive Alex Thursby. Mortgages “will increasingly become an important business for us,” he said on Wednesday. They work for NBAD because it gets low-cost deposits from the Abu Dhabi government and can thus compete more easily by offering lower interest rates than other banks to high-quality borrowers, he said.

Mr. Thursby called the central bank rules “very good for sustainability and safety.” Time will tell whether Dubai’s aggressive developers come around to that view.